HPE's hybrid IT approach pays dividends in Q1: Will growth continue?

Hewlett Packard Enterprise’s bet on hybrid IT and move away from commodity servers appears to be paying off, but there are a bit of unknowns about the revenue growth curves ahead.

The company reported first quarter earnings of 89 cents a share on revenue of $7.7 billion, up 11 percent from a year ago. Non-GAAP earnings of 34 cents a share excluded tax benefits.

HPE’s results topped estimates and the company upped its outlook too. But the big news was that HPE delivered solid revenue growth. In fact, HPE’s revenue growth was the best in recent memory even adjusting for currency where sales would have been up 9 percent from a year ago.

Clearly, HPE’s first earnings conference call with Antonio Neri was a success. However, there are some key items. Among the moving parts:

The company fared well with selling servers to corporate customers who are buying into HPE’s hybrid IT vision with intelligent edge computing.

But much of HPE’s sales gains were due to price increases as it passed through higher commodity costs. Notably memory costs.

In October, HPE laid out projections for flat revenue growth to up 1 percent for the year.

So what’s it going to be HPE? Double digit growth or the land of flat revenue. Neri hedged on the conference call:

We obviously are committed to the financial architecture we laid out in October at the Security Analyst meeting. Again, let’s go back to the Q1 growth, again a lot of that was obviously the increases we see. We saw in the market because the prices increasing. But also strong execution. I think, when I think about the Q1 results is a proof point of we have the right strategy and focus. I think we have to see what the pricing environment is going to do, but overall, I think our focus is really to be the portfolio from the volume side of the house to the value set of the house, which obviously, the growth rates are very different.

In other words, HPE’s pricing power may not last. HPE’s Neri also noted that the company will have harder comparisons in the second half. Nevertheless, HPE’s hyperconverged infrastructure, approach to hybrid IT, storage (Nimble and 3Par) and intelligent edge (Aruba) businesses are faring well.

While HPE benefited from the lower US tax rate and an FX tailwind, the results were solid even adjusting for these, validating our view that HPE’s underlying business trends are better than investors believe.

Meanwhile, HPE CFO Timothy Stonesifer said IT spending is solid.

From a macro perspective, we continue to see a broadly improving IT spend environment from improved customer demand.

Neri also said that it is focusing its efforts on high performance computing and hyperconverged systems. “We are totally deemphasizing the focus on what we call the customized, commoditized, compute platforms,” he said.

HPE’s strong quarter appears to be a great start to fiscal 2018. In the end, it’ll need a few more to convert doubters.